Adjustable-Rate Mortgage (ARM)
When someone is shopping for a home loan, one option is the ARM, or adjustable rate mortgage. These mortgages have rates that are fixed for specific periods of time and change according to a specific schedule. Typical ARMs feature an initial interest rate that is fixed for a particular amount of time, followed by an adjustment period; for instance, an ARM can feature an interest rate that is fixed for three years on a 10-year loan. Most ARMs have a maximum cap which provides the consumer a guarantee that the rate will not increase over a specified amount over the life of the loan. Some ARMs also offer the option to convert to a fixed rate after a specific period of time. For someone who has an existing mortgage, an ARM may enable lowering his or her monthly payment, and it is a good option for a consumer who does not plan to stay in his or her home for more than five years.